Financial Management Midterm Exam

Long-term liabilities represent obligations of the firm lasting more than ______. 1 year 90 days 1 month 6 months

1 year

Which one of the following is a capital structure decision? a.) Determining the optimal inventory level b.) Establishing the preferred debt-equity level c.) Selecting new equipment to purchase d.) Setting the terms of sale for credit sales e.) Determining when suppliers should be paid

Establishing the preferred debt-equity level

True or false: Current assets plus current liabilities equals net working capital.

False

True or false: The times interest earned ratio is EBIT minus interest.

False

How is the inventory turnover ratio computed? Cost of goods sold/Inventory Inventory/Total assets Current assets/Inventory Inventory/Cost of good sold

Cost of goods sold/Inventory

If a company has inventory, the quick ratio will always be Blank______ the current ratio. less than greater than equal to

less than

The ______ tax rate is the tax rate paid on the next dollar of income. minimum average maximum marginal

marginal

One of the most important uses of financial statement information within the firm is: performance evaluation. competitor analysis. credit analysis. investment analysis.

performance evaluation

Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as ______. fixed costs product costs variable costs period costs

period costs

Net capital spending is equal to ending net fixed assets minus beginning net fixed assets ______. plus depreciation minus the change in inventory plus the change in inventory minus depreciation

plus depreciation

The issuer of a security must be involved in all _____ transactions involving that security. a.)exchange-listed b.)secondary market c.)over-the-counter d.)dealer market e.)primary market

primary market

Financial leverage refers to a firm's______. use of debt in its capital structure net working capital organizational structure

use of debt in its capital structure

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict? a.) Organizational b.) Structural c.) Formative d.) Agency e.) Territorial

Agency

Jordan and Carmen created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts? a.) Limited partnership b.) Corporation c.) Sole proprietorship d.) General partnership e.) Public company

Corporation

True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.

False

Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firm's: a.) capital structure. b.) capital budget. c.) asset allocation. d.) working capital. e.) risk structure.

capital structure.

In finance, the value of a firm depends on its ability to generate ______. cash flows earnings per share net working capital net income

cash flows

______ are the prime source of information about a firm's financial health. A.) Stock brokers B.) Historical returns C.) Stock prices D.) Financial statements

Financial statements

Vera opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Vera own if she is personally liable for all the store's debts? a.) Sole proprietorship b.) Limited partnership c.) Corporation d.) Joint stock company e.) General partnership

Sole proprietorship

True or false: Dividends paid minus net new equity raised equals cash flow to stockholders.

True

In practice, accountants tend to classify costs as either Blank______ costs or ______ costs. product; variable variable; fixed product; period fixed; period

product; period

Which one of the following equations defines the total asset turnover ratio? sales/total assets current assets/sales total assets/sales sales/fixed assets

sales/total assets

You contacted your stock broker this morning and placed an order to sell 300 shares of a stock that trades on the NYSE. This sale will occur in the: a.) dealer market. b.) over-the-counter market. c.) secondary market. d.) primary market. e.) tertiary market.

secondary market.

Working capital management includes which one of the following? a.) Deciding which new projects to accept b.) Deciding whether to purchase a new machine or fix a currently owned machine c.) Determining which customers will be granted credit d.) Determining how many new shares of stock should be issued e.) Establishing the target debt-equity ratio

Determining which customers will be granted credit

Costs that do not change in the short run arise because of _____. variable commitments unfunded commitments fixed commitments unknown future events

fixed commitments

A sole proprietorship: a.) provides limited financial liability for its owner. b.) involves significant legal costs during the formation process. c.) has an unlimited life. d.) has its profits taxed as personal income. e.) can generally raise significant capital from non-owner sources.

has its profits taxed as personal income.

Period costs are the costs that are allocated to a specific ______. type of service product interval of time production run

interval of time

A firm may use a price-sales ratio when it has had _______ earnings over the past year. A.) positive B.) negative

negative

The primary goal of financial management is most associated with increasing the: a.) dollar amount of each sale b.) traffic flow within the firm's stores c.) fixed costs while lowering the variable costs d.) firm's liquidity e.) market value of the firm

market value of the firm

The______ principle of GAAP states that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service. tax historic revenue matching

matching

The balance sheet identity shows that stockholders' equity equals assets ______ liabilities. plus minus times

minus

What is the formula for computing the internal growth rate (IGR)? A.) (ROA × b)/(1 + ROA × b) B.) (ROE × b)/(1 − ROE × b) C.) (ROA × b)/(1 − ROA × b) D.) (ROA + b)/(1 − ROA × b)

(ROA × b)/(1 − ROA × b)

What is the formula for computing a firm's sustainable growth rate? A.) (ROE × b)/(1 + ROE × b) B.) (ROA × b)/(1 − ROA x b) C.) (ROE × b)/(1 − ROE × b) D.) (ROE + b)/(1 − ROE × b)

(ROE × b)/(1 − ROE × b)

Which of the following is the correct representation of the total debt ratio? A.) (Total assets − Total equity)/(Total assets) B.) Total equity/Total long-term debt C.) Long-term debt/Total assets

(Total assets − Total equity)/(Total assets)

Which one of the following occupations best fits into the corporate area of finance? a.) Mortgage broker b.) Treasury bill analyst c.) Chief financial officer d.) Insurance risk manager e.) Local bank manager

Chief financial officer

One advantage of the corporate form of organization is the: a.) taxation of the corporate profits. b.) unlimited liability for its shareholders. c.) double taxation of profits. d.) ability to raise larger sums of equity capital than other organizational forms. e.) ease of formation compared to other organizational forms.

ability to raise larger sums of equity capital than other organizational forms.

A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts? stockholders' equity accounts receivable accounts payable retained earnings

accounts receivable

Which one of these is considered to be the most liquid? inventory land accounts receivable equipment and machines

accounts receivable

Net income refers to income earned ______. before interest and taxes prior to taxes net of operating and administrative costs after interest and taxes

after interest and taxes

In the long run, costs may be considered as ______. all variable some fixed and some variable all fixed

all variable

The shareholders of Qiang's Markets would benefit if the firm were to be acquired by Better Foods. However, Weil's board of directors rejects the acquisition offer. This is an example of: a.) a corporate takeover. b.) a capital structure issue. c.) a working capital decision. d.) an agency conflict. e.) a compensation issue.

an agency conflict.

The short run is ______. defined as one month defined as more than one year an imprecise period of time defined as six months

an imprecise period of time

The cash flow identity states that cash flows from ______ should equal cash flows to creditors and equity investors. net working capital assets changes in net working capital operations

assets

Liquidity refers to the ease of changing ______. assets to cash liabilities to assets cash into other assets cash to liabilities

assets to cash

Common-size statements are best used for comparing: (select all that apply) A.) firms in different industries. B.) competitors. C.) year-to-year for your firm. D.) firms of different sizes.

b, c, d

Select all that apply Which of the following are components of cash flow from assets? a.)net new equity b.)operating cash flow c.)change in net working capital d.) net new borrowing e.) capital spending

b, c, e

According to GAAP, when is revenue recognized on an income statement? (Select all that apply) a.) after the related expenses are paid in full b.) when the earnings process is virtually completed c.) only when cash has been received for the sale d.) when the value of an exchange of goods or services is known or reliably determined

b, d

Depreciation is the accountant's estimate of the cost of Blank______ used in the production process matched with the benefits produced from owning it. (select all that apply) cash fixed assets inventory equipment

b,d

On the balance sheet, assets are listed at their Blank______ value. estimated economic book market

book

Which of the following are classified as liabilities on a firm's balance sheet? marketable securities accounts receivable accounts payable long-term debt

c, d

ax rates for proprietorships, partnerships, and LLCs ______ with the passage of the Tax Cuts and Jobs Act of 2017. flattened changed increased

changed

The more debt a firm has, the greater its: degree of operating leverage. book value. retained earnings. degree of financial leverage.

degree of financial leverage

Which of the following is an example of a noncash item on an income statement? retained earnings depreciation costs dividends

depreciation

Marginal tax rates are the most important tax rates because: a) financial decisions are usually based on new cash flows. b) because the IRS says so. c) incremental cash flows are taxed at marginal tax rates. d) financial decisions are usually based on previous changes in cash flows. e.) a & c f.) all of the above

e.) a,c

The Sarbanes-Oxley Act of 2002 has: a.) reduced the annual compliance costs of all publicly traded firms in the U.S. b.) decreased senior management's involvement in the corporate annual report. c.) greatly increased the number of U.S. firms that are going public for the first time. d.) decreased the number of U.S. firms going public on foreign exchanges. e.) essentially made officers of publicly traded firms personally responsible for the firm's financial statements.

essentially made officers of publicly traded firms personally responsible for the firm's financial statements.

True or false: Blue Company and Red Company have equal levels of current assets and current liabilities. Blue Company has higher inventory levels than Red Company. Blue Company is more liquid than Red Company.

false

Long-term solvency ratios are also known as: profitability ratios. financial leverage ratios. market value ratios. turnover ratios.

financial leverage ratios

When conducting a financial analysis of a firm, financial analysts: a.) cannot use accounting information as it is historical. b.) rely solely on accounting information. c.) frequently use accounting information. d.) ignore accounting information but do use marketing information. e.) assume the future will be a repeat of the past as reflected in the firm's accounting reports.

frequently use accounting information.

The purpose of a(n) ______ is to measure performance over a set period of time. income statement prospectus balance sheet statement of cash flows

income statement

An increase in the profit margin will ______ a firm's sustainable growth rate. not change decrease increase

increase

Cash flow to creditors equals: interest paid minus net new borrowing. interest paid plus net new borrowing. interest plus dividends paid. stock repurchased plus interest paid.

interest paid minus net new borrowing.

A corporation: a.) is ultimately controlled by its board of directors. b.) is a legal entity separate from its owners. c.) is prohibited from entering into contractual agreements. d.) has its identity defined by its bylaws. e.) has its existence regulated by the rules set forth in its charter.

is a legal entity separate from its owners.

Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio? A.) accrued interest expense B.) cash expenses C.) cash equivalents D.) noncash expenses

noncash expenses

A primary reason that accounting income differs from cash flow is that an income statement contains ______. expenses paid noncash items cash balance collection from customers

noncash items

Earnings management is a controversial practice in which corporations ______ or ______ their earnings to "smooth out" dips and surges and keep investors calm. change; don't change overstate; inflate lie; fudge overstate; understate

overstate; understate

Days' sales in receivables is given by the following ratio: 365/sales 365/receivables turnover accounts receivable/365 receivables turnover/365

365/receivables turnover

Which one of the following situations is most apt to create an agency conflict? a.) Compensating a manager based on his or her division's net income b.) Giving all employees a bonus if a certain level of efficiency is maintained c.) Hiring an independent consultant to study the operating efficiency of the firm d.) Basing management bonuses on the length of employment e.) Laying off employees during a slack period

Basing management bonuses on the length of employment

True or false: Financial ratios are computed using only balance sheet information.

false

Which one of the following best explains why financial managers use a common-size balance sheet? A.) to track changes in a firm's capital structure B.) to keep an eye on the firm's profit margin C.) to identify changes in operating costs D.) to monitor labor costs

to track changes in a firm's capital structure

Shareholders' equity equals Blank______. current assets minus current liabilities assets + liabilities total assets minus total liabilities total assets minus long-term debt

total assets minus total liabilities

Free cash flow is better described as ______. cash balance after tax payment total distributable cash flow noncash expenses fixed asset investments

total distributable cash flow

According to GAAP, when is income reported? when cash payment is received when it is first anticipated whenever the firm decides to report it when it is earned or accrued

when it is earned or accrued

The daily financial operations of a firm are primarily controlled by managing the: a.) total debt level b.) working capital c.) capital structure d.) capital budget e.) long-term liabilities

working capital

Raleigh BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts are referred to as: a.) capital structure decisions. b.) capital budgeting decisions. c.) working capital management. d.) operating management. e.) fixed account structure.

working capital management

Which one of the following functions is generally a responsibility assigned to the corporate treasurer? a.) Cost accounting b.) Data processing c.) Corporate taxes d.) Financial accounting e.) Capital expenditures

Capital expenditures

Deandre and Mason both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Deandre and Mason will equally share in the decision making and in the business profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts? a.) Sole proprietorship b.) Limited partnership c.) Corporation d.) Joint stock company e.) General partnership

General partnership

Silvia is employed as a currency trader in the Japanese yen market. Her job falls into which one of the following areas of finance? a.) International finance b.) Financial institutions c.) Corporate finance d.) Capital management e.) Personal finance

International finance

If you accept a job as a domestic security analyst for a brokerage firm, you are most likely working in which one of the following financial areas? a.) International finance b.) Private placements c.) Corporate finance d.) Capital management e.) Investments

Investments

What will happen to the current ratio if current assets increase, while everything else remains unchanged? A.) It will decrease. B.) It will not be affected. C.) It may either increase or decrease. D.) It will increase.

It will increase

Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners? a.) Sole proprietorship b.) General partnership c.) Limited partnership d.) Limited liability company e.) Corporation

Limited partnership

How is the price-earnings (PE) ratio computed? A.) Market price per share/Earnings per share B.) Sales price per unit/Earnings per share C.) Book value per share/Earnings per share D.) Market capitalization/Earnings per share

Market price per share/Earnings per share

Which one of the following statements correctly applies to a sole proprietorship? a.) The business entity has an unlimited life. b.) The ownership can easily be transferred to another individual. c.) The owner enjoys limited liability for the firm's debts. d.) Debt financing is easy to arrange in the firm's name. e.) Obtaining additional equity is dependent on the owner's personal finances.

Obtaining additional equity is dependent on the owner's personal finances.

Which of the following represents the receivables turnover ratio? Sales/Accounts receivable Accounts receivable/Cost of goods sold Accounts receivable/Sales Cost of goods sold/Accounts receivable

Sales/Accounts receivable

Capital budgeting includes the evaluation of which of the following? a.) Size of future cash flows only b.) Size and timing of future cash flows only c.) Timing and risk of future cash flows only d.) Risk and size of future cash flows only e.) Size, timing, and risk of future cash flows Correct

Size, timing, and risk of future cash flows Correct

Which one of the following correctly defines a common chain of command within a corporation? a.) The controller reports directly to the corporate treasurer. b.) The treasurer reports directly to the board of directors. c.) The chief financial officer reports directly to the board of directors. d.) The credit manager reports directly to the controller. e.) The controller reports directly to the chief financial officer.

The controller reports directly to the chief financial officer.

What is depreciation? a.) the market value of an asset minus the asset's book value b.) a systematic cash contribution to a company's checking account to fund a new asset c.) the current market value of an asset minus the asset's initial cost d.) a systematic expensing of an asset based on the asset's estimated life

a systematic expensing of an asset based on the asset's estimated life

What should you keep in mind when examining an income statement? (select all that apply) a.) time and costs b.) cash versus noncash items c.) asset composition d.) GAAP

a, b, d

Which of the following would help a company take action to improve its ratios? (select all that apply) A.) comparing to major competitors B.) comparing to aspirant companies C.) comparing to its own historical ratios D.) comparing to DOW 30 companies E.) comparing to peer companies

a,b,c,e

A balance sheet reflects a firm's: earnings per share over an unspecified time. income at a specific time. accounting value on a specific date. economic value over a specified time period.

accounting value on a specific date

Which one of the following functions should be assigned to the corporate treasurer rather than to the controller? a.) Data processing b.) Cost accounting c.) Tax management d.) Cash management e.) Financial accounting

Cash management

Which one of the following parties can sell shares of ABC stock in the primary market? a.) ABC company b.) Any corporation, other than the ABC Company c.) Any institutional shareholder d.) Any private individual shareholder e.) Only officers and directors of ABC Company

ABC company

Which one of the following is a working capital decision? a.) How should the firm raise additional capital to fund its expansion? b.) What debt-equity ratio is best suited to the firm? c.) What is the cost of debt financing? d.) Should the firm borrow money for five or ten years? e.) How much cash should the firm keep in reserve?

How much cash should the firm keep in reserve?

Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of 2002? a.) Decrease the number of corporations that can be publicly traded b.) Increase the protections against corporate fraud c.) Limit secondary issues of corporate securities d.) Increase the dividends paid to shareholders e.) Increase the number of firms that "go dark"

Increase the protections against corporate fraud

One example of a primary market transaction would be the: a.) sale of 100 shares of stock by Maria to her best friend. b.) purchase by Theo of 5,000 shares of stock from his father. c.) sale of 1,000 shares of newly issued stock by Alt Company to Miquel. d.) sale by Terry of 50,000 shares of stock to his brother. e.) sale of 5,000 shares of stock owned by a corporate CEO to his son.

sale of 1,000 shares of newly issued stock by Alt Company to Miquel.

Who is entitled to the residual value of a firm's cash flows? Occupy Wall Street protesters shareholders the Internal Revenue Service bondholders

shareholders

An employee has a claim on the cash flows of Westlake Machines. This claim is defined as a claim by one of the firm's: a.) residual owners. b.) shareholders. c.) financiers. d.) provisional partners. e.) stakeholders.

stakeholders.

Physical assets are termed ______ assets. long-term current tangible intangible

tangible

The market value of an item is: the cash value you'd get if you sold it. the amount recorded in the balance sheet. its appraised value. the amount you paid it.

the cash value you'd get if you sold it

An agency issue is most apt to develop when: a.) a firm encounters a period of stagnant growth. b.) a firm downsizes. c.) the control of a firm is separated from the firm's ownership. d.) the firm's owner is also its key manager. e.) a firm is structured as a general partnership.

the control of a firm is separated from the firm's ownership.

The primary goal of financial management is to maximize: a.) current profits. b.) market share. c.) current dividends. d.) the market value of existing stock. e.) revenue growth.

the market value of existing stock.